Microsoft rebuffed by Yahoo

Yahoo's CEO has revealed that Microsoft tried to buy a portion of Yahoo's …

Though Microsoft now appears bullish on Windows Live Search, the company's new and improved search engine (still in beta), they first wanted to buy a piece of Yahoo's search business instead. The revelation was made by Yahoo CEO Terry Semel, who went on to say that Yahoo had no intention of selling stakes in its key business.

"Microsoft taking over Yahoo - that conversation has never come up," Mr Semel said at a question and answer session organised by Syracuse University's Newhouse School. "[We discussed] search, and Microsoft co-owning some of our search. I will not sell a piece of search - it is like selling your right arm while keeping your left. It does not make any sense."

We reported on earlier talks between Microsoft and Yahoo, including speculation that Microsoft could buy Yahoo outright or purchase an equity stake in the company. Semel made it clear that this is not happening. He went on to offer his own "impartial advice" to Microsoft, saying, "You have no chance. The search business has been formed."

This isn't the sort of advice that Microsoft is likely to heed. After being rebuffed by Yahoo, the company apparently decided to go it alone by retooling their search engine and by developing their own search advertising program (much of the advertising had previously been handled by Yahoo). Once that decision was made, Microsoft devoted significant resources to the project and snapped up smaller companies like in-game advertiser Massive. Microsoft apparently wants to build a one-stop shop for advertising that will allow marketers to buy placements in Xbox 360 games, Windows Live services, and search results.

So will it work? In the search market, Microsoft (13.2 percent) comes significantly behind Google (42.7 percent) and Yahoo (28 percent), which explains their desire to partner with Yahoo. To be valuable, Microsoft's new advertising services have to deliver eyeballs to marketers, and at the moment, most of those eyeballs are going elsewhere.

Fortunately for Microsoft, they have a significant online presence that extends beyond search: the various MSN properties, services like Hotmail (which will eventually be replaced with Windows Live Mail), and Xbox Live. All of these services offer plenty of room for non-search related advertising. The new set of Windows Live tools, especially, could bring in big advertising dollars if Microsoft can successfully leverage the Windows name to get millions of new customers using its online services. This could certainly be a profitable business for Microsoft to get into, and one that has strong growth potential. It's interesting to note, though, that this was apparently Plan B.